JPMORGAN CHASE WHALE TRADES: A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES

159
For both the bank and its business units, risk limits were categorized as either Level 1 or
Level 2 limits. Breaches of Level 1 limits were viewed as more serious. According to a March
2012 JPMorgan Chase presentation on market risk limits, the “[CIO] Risk Committee reviews
Level 1 and Level 2 limits for each business on a monthly basis.” 876 When Level 1 firm limits
were breached, the firm Operating Committee was notified by email. Changes in or waivers of
bankwide Level 1 limits required the approval of the CEO and CRO. Changes in or waivers of a
business unit’s Level 1 limits also required the approval of the unit head and its CRO. 877 For
example, the bankwide 10Q VaR limit was a Level 1 limit; its waiver or adjustment required Mr.
Dimon's approval. 878 The CIO 10Q VaR limit was a Level 1 limit inside the CIO; its waiver or
adjustment required the approval of Ina Drew. 879
Documents obtained by the Subcommittee indicate that, in theory, breaches of Level 1
and Level 2 risk limits—“excessions” in the bank’s parlance—required immediate remedial
action. A March 2012 JPMorgan Chase presentation provided to the OCC, for example, outlines
the actions that were supposedly mandatory when those risk limits were breached. It states that,
for breaches of Level 1 and Level 2 limits: “Business unit must take immediate steps toward
reducing the exposure to be within the limit, unless a One-off Approval is granted by all Grantors
and Grantees of limits.” 880 JPMorgan Chase’s 2011 Annual Report states: “Limit breaches are
reported in a timely manner to senior management and the affected line-of-business is required
to reduce trading positions or consult with senior management on the appropriate action.” 881
In practice, the bank told the Subcommittee that its risk metrics were intended to act, not
as ironclad limits, but as guidelines and red flags. Mr. Dimon told the Subcommittee that a
breach in a risk “limit” was intended to lead to a conversation about the situation, not to an
876
See, e.g., 3/2012 presentation prepared by JPMorgan Chase entitled “Market Risk Limits,” at 1, OCC-SPI-
00117682.
877
Id. at 13.
878
Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012).
879
See also 2013 JPMorgan Chase Task Force Report, at 75-76 (describing the CIO’s risk limit policy: “The three
categories of risk metrics applicable to CIO were VaR, stress, and non-statistical credit-spread widening metrics
(Credit Spread Basis Point Value (‘CSBPV’) and CSW 10%). Pursuant to Firm policy, each of these metrics was
subject to certain limits. Limits are classified by type, as Level 1, Level 2, or ‘threshold.’ A limit’s type determines
who is responsible for approving the limit, who receives notice of any excessions, and who within the Firm is
responsible for approving any increases. The CIO Global 10-Q VaR and CIO stress limits were Level 1 limits, while
the CIO CSBPV and CSW 10% limits were Level 2 limits. Any excessions of Level 1 or Level 2 limits had to be
reported to the signitories to the limit, the risk Committee for the line of business, and the Market Risk Committee
or Business Control Committee for the line of business. Under Firm policy, all excession notifications should
include (1) a description of the limit excess, (2) the amount of the limit, (3) the exposure value (i.e. the amount by
which the limit has been exceeded) and the percentage by which the limit has been exceeded, and (4) the number of
consecutive days the limit has been exceeded.”).
880
See, e.g., 3/2012 presentation prepared by JPMorgan Chase entitled “Market Risk Limits,” at 13, OCC-SPI-
00117682.
881
3/30/2012, “2011 Annual Report,” JPMorgan Chase publication, at 162,
http://files.shareholder.com/downloads/ONE/1839748086x0x556139/75b4bd59-02e7-4495-a84c-
06e0b19d6990/JPMC_2011_annual_report_complete.pdf. See also 2013 JPMorgan Chase Task Force Report, at 76
(describing how the CIO was supposed to respond to risk limit breaches: “Excessions are addressed differently
depending on type, but in the event of ‘active limit excess,’ which occurs when a business unit exceeds its own limit,
the business unit ‘must take immediate steps to reduce its exposure so as to be within the limit,’ unless a ‘one-off
approval’ is granted. A ‘one-off approval’ refers to a temporary increase for a limited period of time; it must be
provided by the persons who were responsible for setting the original limit.”).